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Time is Money: Optimal Investment Delay in Procurement (and Concession) Contracts


  • D'Alpaos, Chiara
  • Moretto, Michele
  • Valbonesi, Paola


Procurement (and concession) contracts are agreements granting the right to construct public works, operate and provide a service/good. The main advantage of a procurement contract is that it passes full responsibility for investment and operations to the private sector and consequently provides incentives for efficiency. Although most contracts include penalty/premium clauses to avoid construction risks (i.e. delays), evidence from ongoing procurement contracts shows that there are many delays in making investments. Actually these clauses introduce the flexibility to decide when it is optimal to invest and consequently increase the contract’s value for the contractor. Therefore if the contracting authority underestimates penalty/premium fees, these may be totally ineffective in avoiding construction risks. In this paper we specifically investigate the effects that penalty/premium clauses have on both contract value and reduction of delay. We also focus on the design of optimal penalty/premium rules.

Suggested Citation

  • D'Alpaos, Chiara & Moretto, Michele & Valbonesi, Paola, 2006. "Time is Money: Optimal Investment Delay in Procurement (and Concession) Contracts," Conference Papers 6642, University of Minnesota, Center for International Food and Agricultural Policy.
  • Handle: RePEc:ags:umcicp:6642

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    References listed on IDEAS

    1. Chiara D'Alpaos & Cesare Dosi & Michele Moretto, 2005. "Concession lenght and investment timing flexibility," Working Papers ubs0502, University of Brescia, Department of Economics.
    2. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    3. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
    4. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
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    Public Economics;


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